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Hugo boss plays catch-up in china

Source: www.bloomberg.comDate: 20-04-2012Visits: 225

Even though it’s the world’s hottest market, especially for luxury goods, China offers no guarantees. Just ask Hugo Boss (BOS). The German luxury clothing maker began selling its apparel through franchisees or by wholesaling goods to independent retailers in Hong Kong as early as 1982, but it didn’t open its first company-run stores in China until 2006, 15 years after Italian suitmaker Ermenegildo Zegna.

That slow start, and an emphasis on opening stores in lots of cities rather than concentrating on the most affluent metropolises, have taken a toll. Although Hugo Boss now has about 90 of its own stores in Greater China (which includes Macau and Hong Kong) and 30 percent of all its shops in Asia, the region made up a mere 15 percent of the clothier’s ? billion ($2.67 billion) revenue last year. At Burberry Group (BRBY), Asia sales almost equaled European revenue last year, at 32.6 percent.

“They entered China in too timid a way, and now they need to change their distribution strategy” to retailing, says Armando Branchini, founder of luxury consultancy InterCorporate in Milan. “Competition is much tougher than years ago. The wholesale strategy does not provide the service quality and product assortment that the consumer wants for luxury items.”

Makers of pricey apparel and accessories cannot ignore China’s brand-conscious consumers. Luxury goods sales in Greater China climbed 29 percent, to ?3.5 billion in 2011, Bain & Co. estimates, with Chinese customers accounting for more than 20 percent of global luxury consumption. To raise its brand’s profile among the mainland’s affluent, Hugo Boss will open about 20 stores in China this year, including an 800-square-meter (8,600 square foot) flagship in Shanghai, start online sales, and invite 1,500 guests to a fashion show in Beijing in May. “If you want to be successful in China, you need to be visible in Beijing, in Shanghai, as well as in Hong Kong,” Chief Executive Officer Claus-Dietrich Lahrs says. “In the past, we underestimated the need to make an impact in those three cities.”

Hugo Boss elsewhere sells a variety of lines, including lower-priced sportswear and leisure clothing. But in China, it’s pushing its high-end Selection line, with suits for ?49 ($865) and jeans for ?49. That’s expensive, but frequently less so than Zegna, which offers suits for ?,490 and leather shoes for ?80.

Under Lahrs, who joined Hugo Boss in 2008 after stints with Christian Dior and LVMH Moët Hennessy Louis Vuitton (MC), store locations are improving, says Anna Patrice, an analyst at Berenberg Bank. He’ll add a store in Taipei 101, the world’s second-tallest building, in May. Hugo Boss’s two-story Shanghai store, to open in December in the Jingan district’s Kerry Center, is near Gucci, Giorgio Armani, and Montblanc stores. “If there are sophisticated, high-end stores in those new luxury malls, it’s the right place for Hugo Boss also to be,” Chief Financial Officer Mark Langer says.

Although the Hugo Boss brand is almost 90 years old, it didn’t begin operating company-owned stores until the 1980s. It had 622 stores worldwide at the end of 2011. The wholesale model works well in Europe and the U.S., where department stores have long hawked multiple high-end brands. Not so on the mainland. “In China, our typical wholesale distribution model does not exist,” CFO Langer says. By 2015, Hugo Boss hopes to build its own retail operations to 55 percent of its total revenues, up from 45 percent currently. Retail staff may also make up the biggest proportion of employees for the first time this year, says Lahrs, who wants to raise Asia sales to more than 20 percent of Hugo Boss’s total by 2015.

Still, the company is expanding in China after the “gravy train” has passed, figures Luca Solca, global head of European equity research at brokerage CA Cheuvreux. That’s because growth in luxury sales is slowing even as competition increases. Michael Kors Holdings (KORS) will open 15 stores in Greater China in 2012 and hopes to have a total of 100 in five years. Zegna this year will add 10 stores to the 82 it has in China, which is its strongest-growing market. And Hermès International (RMS) plans to open a flagship store in Shanghai in late 2013. “I expect that our catch-up activity in this part of the world will eventually help us to go beyond what we see as a slight slowdown of activity in the retail world,” Lahrs said in March.

The bottom line: Hugo Boss was slow in operating its own stores in China. Now it gets just 15 percent of sales in Asia, far less than some luxury rivals.